You have just graduated from the MSBM with a Masters' Degree in Corporate Finance and you were successful in your application for the position of Bank Manager of First National Bank. The bank's balance sheet is shown below and balances are in millions, (interest rates and duration are in parentheses). The duration of the assets is 4.00776 years and the duration of the liabilities is 1.605753 years. Interest rates are forecasted to fall by forty (40) basis points in the upcoming twelve (12) months, however you have the discretion to adjust rates on the balance sheet plus or minus five (5) basis points relative to the forecast without jeopardizing your competitiveness in the commercial banking sector. In response to this forecast, your board at your last meeting, suggested that you should decrease interest rates on your rate sensitive assets in keeping with the forecast and decrease rates on your rate sensitive liabilities by thirty (30) basis points. a. Write a detailed report assessing the potential impact on the bank's bottom line if you were to make the adjustments as suggested by your board. Include in your report any alternative strategy that you would recommend (if any), to ensure the optimal impact on your bottom line. The assessment &/or alternative strategy (if applicable) MUST have supporting calculations and explanations of the influence of the spread effect and the CGAP effect. (30 Marks) b. In addition to the above your board has asked you to draw brief report assessing the potential change on the bank's equity value if the relative change in all market interest rates is as forecasted (i.e r / (1+r) = - 0.0038). Include in your report any recommendations you may have (if any) based on the results of your assessment. (10 Marks) FIRST NATIONAL BANK Cash 48 $ Demand Deposits 253 $ Fed Funds (2.05%, 0.02 years) 350 $ Savings Account (0.5%, 1.25 years) 65 $ 3 Month Tbills (3.25%, 0.22 years) 315 $ Money Market Deposit Accounts (3.5%, 0.50 years) 250 $ 8 Year Tbonds (6.50%, 7.55 years) 199 $ 3 Month CDs (3.2%, 0.20 years) 300 $ 5 Years Tbonds (7.20%, 4.25 years) 50 $ 1 Year CDs (3.5%, 0.95 years) 189 $ 6 Month Consumer Loans (5%, 0.42 years) 316 $ 5 Year CDs (5%, 4.85 years) 755 $ 5 Year Car Loans (6%, 3.78 years) 104 $ Fed Funds (2%, 0.02 years) 407 $ 7 Month C&I Loans (4.8%, 0.55 years) 400 $ Repos (2%, 0.05 years) 558 $ 2 Year C &I Loans (4.15%, 1.65 years) 277 $ 6 Month Commercial Paper (4.05%, 0.55 years) 352 $ Fixed Rate Mortgages maturing in 5 months (5.10%, 0.48 years) 586 $ 1 Year Fixed Rate Subordinated Notes (5.55%, 0.92 years) 241 $ Fixed Rate Mortgages maturing in 1 year (6.85%, 0.85 years) 421 $